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By
Reuters
Published
Jul 15, 2014
Reading time
3 minutes
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UK inflation jumps unexpectedly in June to 1.9 percent

By
Reuters
Published
Jul 15, 2014

 British inflation unexpectedly surged to a five-month high last month and house prices continued to accelerate, prompting financial markets to increase bets on an early Bank of England rate rise.

Consumer prices rose 1.9 percent on the year in June, the Office for National Statistics said. Economists taking part in a Reuters poll had expected inflation to rise to just 1.6 percent from 1.5 percent, a four and a half year low, in May.


Separate data showed house prices also picked up speed, with property prices in London jumping by a record 20.1 percent over the 12 months to May.

Inflation in Britain had been largely declining over the last year, helping the Bank of England to hold off on raising interest rates despite Britain's surprisingly strong economic recovery.

Tuesday's data caused British government bond prices to tumble and sterling to rise as markets grew more confident that the Bank of England could raise rates before the end of the year.

"The amount of spare capacity in the UK economy is being eroded," said ING economist James Knightley. "Given the BoE is targeting inflation in 2 years' time, not what it is doing right now, we now favour a rate hike in November."

However, some economists said the scale of June's inflation increase was largely driven by one-off factors.

The largest contribution to the year-on-year increase came from clothing and footwear prices - which did not fall as usually occurs in June when summer sales tend to start.

An ONS official said there were signs that good weather last month may have deterred retailers from cutting prices.

Food also contributed after it was weak last year. The ONS said there were no significant downward contributions to consumer price inflation.

Temporary spike?

Samuel Tombs, UK economist at Capital Economics, said that he expected the rise in inflation to be temporary.

"The rise in clothing inflation ... seems to have largely reflected the later start to the summer sales this year than last, so its annual inflation rate should ease soon," he said.

"In addition, a further significant rise in food inflation .... seems unlikely, given that global agricultural commodity prices have fallen in recent months and a price war between the supermarkets appears to be building," he added.

Before December last year, annual inflation exceeded the Bank of England's 2 percent target every month since December 2009, eroding the spending power of households and making the fall in living standards a big political issue ahead of next year's elections.

An underlying measure of inflation, which strips out increases in energy, food, alcohol and tobacco, rose by 2.0 percent in June compared with the same month last year.

Data also released by the ONS on Tuesday showed that factory gate prices rose by 0.2 percent in annual terms, the lowest reading since October 2009 and undercutting economists' predictions of a 0.5 percent increase.

Separate data from the ONS showed house prices in Britain rose 10.5 percent in the year to May. Other more recent surveys have suggested rapid growth in house prices has started to cool off a little.

Excluding London and the south east, British house prices rose by 6.4 percent in the 12 months to May, the highest in nearly four years.

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